High net worth Indians dump dollar for rupee accounts

Non-Resident Indians (NRI), especially the high networth individuals (HNWI), are massively shifting their dollar denominated deposits into high yielding rupee deposits. In fact, several Indian banks are in the market with new rupee-deposit schemes targeted at NRIs.  

Dollar has always been the preferred currency for HNWIs from India. However, with the US currency weakening against the Indian rupee and the relative low interest yield, many NRIs are shifting their deposits to alternative avenues.

K R Vijayakumar, Assistant General Manager and Chief Representative of Federal Bank, an Indian bank with 600,000 NRI accounts, told ‘ Emirates 24|7’ that the bank has been witnessing massive switching of deposits by NRIs, especially HNWIs - from dollar accounts into rupee accounts.

Taking advantage of the favourable forward-booking dollar rupee premium, Indian banks are engaged in massive NRI deposit mobilisation.

Indian Banks such as the State Bank of Travancore, Federal Bank, Catholic Syrian Bank, are now offering alternative deposit schemes, different from the conventional NRE and NRO deposits.

“NRI and NRE interest rates have been very low ranging from 2.5 per cent to 3.5 per cent. We have started a new ‘rupee-plus account’, which will offer 7.5 to 8 per cent annual interest.

The rupee-plus accounts are reparable and help account holders maintain NRI status,” said Vijaykumar.

As the rupee has been appreciating against the dollar and interest rate by ‘rupee plus account’ is very attractive, there has been a massive shift from dollar-denominated NRI accounts to rupee-plus accounts, he added. 

Unlike NRO deposits, which are subject to taxation on interest income, rupee-plus accounts income is not subject to taxation. “Many HNWIs are shifting their dollar-denominated deposits to Indian rupee accounts and rupee plus accounts.

Instead of opening fixed deposits in the name of their relatives, NRIs can open their own Rupee Plus accounts and there is no tax on interest income.

The rupee-plus account offers 7 to 8 per cent interest.  Customers can keep their deposits in either dollar or pound and get better yield and avoid paying tax on interest earnings.

When an NRI depsoitor places Dh 10,000 with Federal Bank in rupee-plus account, the bank immediately invests in the best currency yielding maximum forward premium. “We get the dirham or dollar deposit and the customer is ensured seven to eight per cent yield, because if he keeps the money in dollar, the maximum income will be $200, assuming two per cent interest.

If the dollar weakens within one year of deposit period, the deposit holder will be losing money.” “It is a win-win situation for the bank and customer and banks with the best international treasury will make the maximum gains as they can get the better forward premium for rupee. Current forward premium of rupee is 47 and the deposit amount of $10,000 is instantly forward booked and there is no problem even if the rates fluctuate,” Vijaykumar explained. “Many NRIs are showing interest in this rupee-plusaAccount and now yen is becoming the king of currency market,” he added.

A HNWI in Dubai, who did not wish to reveal his name told this website: “For many years, dollar has been the preferred currency for the rich NRIs because even if these deposits offered only 2 or 3 per cent interest income, there was always the premium gain from the weakening of Indian currency. 

Many NRIs have made fancy gains from the persistent rupee weakness in the past and now they are no more interested in a depreciating dollar.

Indian banks cannot offer more interest on NRE or NRO deposits because the Reserve Bank of India has put a cap on the maximum FCNR deposit to the Libor (London Interbank Offered Rate.)

Catholic Syrian Bank, another Indian bank, with 100,000 NRI accounts in the GCC has introduced a new CSB NREPLUS account, offering an alternative product.

The bank has come out with the CSB NREPLUS accounts offering better interest income for the NRIs. “Considering the low interest rate on NRE and FCNR deposits, for enabling NRIs to earn higher on their investments, we have recently introduced CSB NREPLUS that helps NRIs earn higher interest rates on their deposits.

We effectively use forward cover mechanism. Based on the recent forward cover premiums, the effective yield to the deposits can be around 7.25 per cent.

The minimum amount of investment is $10,000 for 366 days,” said VP Iswar Das, Managing Director and Chief Executive Officer (CEO), CSB.

He said the bank is not taking risk on currency exchange rate, but taking a forward cover in advance for the deposit amount.  

Ameir Hamsa, CEO, State Bank of Travancore (GCC Operations), Dubai said the bank witnessed many NRIs shifting their deposits to the newly introduced NRI Premium Account.

“The NRI premium account is offers more income to NRIs. By making an FCNR deposit in US dollar for one year with an amount of $10,000 transferred from an NRE SB/FD account, a forward purchase contract will be booked for the maturity amount of the FCNR deposit and the amount has to be mandatorily converted to Indian rupee on maturity date. The assured return will be better than what the depositor gets in a savings bank account or fixed deposit account. No premature closure of the

account is allowed in this new special product that takes advantage of the favourable premium in US dollar,” added Hamsa.